Oxygen mask for fixed income

Should investment banks cut off the tail before it infects the body, or nurse the area back to health? This is the conundrum confronting bank bosses with fixed income divisions.

Once bread and butter with a dollop of jam on top for bank profits, the industry is now left fighting over stale crumbs. Barclays' restructuring of its investment bank has sparked fresh debate about whether fixed income, currencies and commodities or FICC as it is termed, is on its deathbed because of structural changes caused by increased regulation or merely sickly due to a cyclical decline.

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Antony Jenkins, CEO, Barclays told CNBC "The combination of much greater capital allocation towards FICC activities and the state of the economy with the end of Quantitative Easing means that the outlook for FICC is quite challenged. We believe that will persist for a number of years, which is why now is the right time to reposition the investment bank."

Even those on the front line in emerging markets selling fixed income to new clients and younger markets note the industry is not what it used to be. But is the bloodletting short term, much like what happened post financial crisis to equities? Equities have returned with gusto in the past year and bolstered industry profits.

Bryn Jones, Head of Fixed Income, Rathbone Brothers said the cost of holding capital is much higher for banks so the inventory of bonds to trade is about 10 percent of what it was in 2006. "Liquidity has collapsed, there are not as many bonds to access as before. So do you need as many specialists when the industry is just matching trades?"

Jones said the industry now has a "buy and hold" mentality in bonds because there simply isn't the same liquidity.

Others describe the industry onslaught as both structural and cyclical. Blackrock's Deputy CIO of Fixed Income Scott Thiel said Bank of England and Federal Reserve purchases of gilts and treasurys represent a third of their individual markets, bonds - which are unlikely to come bank into circulation. Thiel added deleveraging of the European banking sector has reduced senior bond issuances.

But opportunists stand ready to scoop up market share in fixed income and happily farewell the exodus.

"I think people have been slightly overplaying the demise of FICC. This is a huge part of the market, transformation of illiquid credit into something that people can buy is going to be around for a long, long time," said Jeremy Bennett, CEO EMEA, Nomura.

The Japanese bank faces competition from the continent; French investment bank Natixis is working around the challenges and also has big ambitions.

"Fixed income has been difficult because the activities of clients have been declining compared to what it was for recent quarters. But we think it is not a long-term trend. Fixed income will pick up again. We are very devoted to developing our fixed-income business in Europe but also in the U.S. where we have invested significantly in our platform," said Laurent Mignon, CEO of Natixis.

Few believe industry regulation will be reversed therefore permanently impacting the cost of holding bonds, but even with that challenge some industry players intend to save fixed income in investment banks from oblivion.